Airtel Oligopoly

Published: 2021-06-27 23:25:04
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ECONOMICS ASSIGNMENT (Ms. Randeep Kaur) SUBMITTED BY: JATINDER PAL SINGH MBA-General Roll No. 12 UBS TELECOM INDUSTRY ‘Indian Telecom Industry’ is the fifth largest and fastest growing industry in the world. Three types of players exists in ‘ Telecom Industry India ‘ community – * State owned companies like – BSNL and MTNL. * Private Indian owned companies like – Reliance Infocom and Tata Teleservices. * Foreign invested companies like – Hutchison-Essar, Bharti Airtel Tele-Ventures, Idea Cellular, Spice Communications etc. Bharti Airtel now is the largest telecom company in India.
There are many smaller players, with operations in only a few states. The following table gives details regarding the subscriber base of each Mobile Service Provider in India as of 31 July 2010 :- BHARTI AIRTEL Bharti Airtel Limited formerly known as Bharti Tele-Ventures LTD (BTVL) is an Indian company offering telecommunication services in 19 countries. It is the largest cellular service provider in India, with more than 141 million subscriptions as of August 2010[update]. Bharti Airtel is the world’s third largest, single-country mobile operator and fifth largest telecom operator in the world with a subscriber base of over 180 million.
It also offers fixed line services and broadband services. It offers its telecom services under the Airtel brand and is headed by Sunil Bharti Mittal. To earn Gold Certification, Bharti Airtel had to meet rigorous standards for networking competency, service, support and customer satisfaction set forth by Cisco. The company also provides land-line telephone services and broadband Internet access (DSL) in over 96 cities in India. It also acts as a carrier for national and international long distance communication services. Globally, Bharti Airtel is the 3rd largest in-country mobile operator by ubscriber base, behind China Mobile and China Unicom. In India, the company has a 30. 7% share of the wireless services market. In January 2010, company announced that Manoj Kohli, Joint Managing Director and current Chief Executive Officer of Indian and South Asian operations, will become the Chief Executive Officer of the International Business Group from 1 April 2010. He will be overseeing Bharti’s overseas business. The company is structured into four strategic business units – Mobile, Telemedia, Enterprise and Digital TV. The mobile business offers services in India, Sri Lanka and Bangladesh.
The Telemedia business provides broadband, IPTV and telephone services in 89 Indian cities. The Digital TV business provides Direct-to-Home TV services across India. The Enterprise business provides end-to-end telecom solutions to corporate customers and national and international long distance services to telcos. SERVICES Mobile Services Airtel is the name of the company’s mobile services brand. It operates in 19 countries and the Channel Islands. It is the 5th largest mobile operator in the world in terms of subscriber base. Airtel’s network consists of 3G and 2G services depending on the country of operation.
In India, the company’s mobile service is branded as Airtel. On 19 October 2004, Airtel announced the launch of a BlackBerry Wireless Solution in India. The launch is a result of a tie-up between Bharti Tele-Ventures Limited and Research In Motion (RIM). On 20 September 2010, Bharti Airtel said that it has given contracts to Ericsson India, Nokia Siemens Networks (NSN) and Huawei Technologies to set up infrastructure for providing 3G services in the country. These vendors will plan, design, deploy and maintain 3G-HSPA (third generation, high speed packet access) networks in 13 telecom circles where the company has won 3G licenses.
While Bharti Airtel has awarded network contracts for seven 3G circles to Ericsson India, NSN would manage networks in three circles. Chinese telecom equipment vendor Huawei Technologies has been introduced as the third partner for three circles. OLIGOPOLY Oligopoly is a market structure characterized by a small number of large firms that dominate the market, selling either identical or differentiated products, with significant barriers to entry into the industry. Oligopoly dominates the modern economic landscape, accounting for about half of all output produced in the economy.
MAIN FEATURES OF OLIGOPOLY: 1. Sellers are few in number 2. Any one of them is of such a size that an increase and decrease in his output will appreciably affect the market price. Infact, the size of each sellers output in relation to the total supply is the test. 3. Each seller knows his competitors individually in each market. Characteristics The three most important characteristics of oligopoly are: (1) An industry dominated by a small number of large firms, (2) Firms sell either identical or differentiated products, and (3) The industry has significant barriers to entry. Small number of large firms: an oligopolistic industry is dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market. This generates substantial market control, the extent of market control depending on the number and size of the firms. * Identical or differentiated products: Some oligopolistic industries produce identical products, while others produce differentiated products. Identical product oligopolies tend to process raw materials or intermediate goods that are used as inputs by other industries.
Notable examples are petroleum, steel, and aluminum. Differentiated product oligopolies tend to focus on consumer goods that satisfy the wide variety of consumer wants and needs. A few examples of differentiated oligopolistic industries include automobiles, household detergents, and computers. * Barriers to entry: Firms in a oligopolistic industry attain and retain market control through barriers to entry. The most common barriers to entry include patents, resource ownership, government franchises, start-up cost, brand name recognition, and decreasing average cost.
Each of these makes it extremely difficult, if not impossible, for potential firms to enter an industry. RULE OF THREE In rule of three oligopoly, 3 major firms control about 70 to 90 percent of a particular industry, with the remaining companies being relegated to the level of niche players. To illustrate this, in the 19th century there were more than 200 cars manufacturers in the U. S. A but now there are only 3 major players,viz. , general motors, ford and Chrysler. Strengths of the Rule of Three: * Rule of thumb. * Identifying the position of a company with respect to competitors. It helps to find a way to improve or change the strategy if required before companies fall in the ditch. COLUUSION In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market form of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion for e. g. OPEC countries. THE KINKED DEMAND CURVE
The dependency and uncertainty aspect of the oligopoly leads to the indeterminateness of the demand curve. The rigid price in oligopoly leading to Kink in demand curve of an oligopolist was put forward independently by Paul Swerzy, an American economist and Hall and Hitch, Oxford economists. Taking an example of an extremely limited case of oligopoly i. e. a case of duopoly were there are only two firms, we can explain an oligopolist’s demand curve- known as Kinky demand curve. Fig 1 explains the derivation of Kinky demand curve: There are two demand curves in the Fig 1 DDa of firm A and DDb of firm B.
The former is more elastic and latter less elastic. At point T the two demand curve intersects. An oligopolist’s demand curve has the shape shown in the Fig 1. At point T it has a Kink. The Td part of the demand curve is more elastic and the TDb part is inelastic. Kinky demand curve is obtained by taking TD part of firm A and TDb part of firm B. In Fig 2 we have OP price at which OM is sold. The price OP is expected to remain without further change hence it is rigid. Let us understand why oligopolies do not like to reduce or increase price of their product.
Reduction in price: If the oligopolist reduces the price below OP to have more sales of his product the rivals will be quick in reducing their price in order to not to lose the market. It is possible the rivals may cut price by a higher margin to capture a larger share of a market. In a process a price reduction, finally oligpolists will not increase their individual sale but may succeed in getting a share of increased total sales dye to reduction in price. Each one’s gain will be a marginal one. Such weak response of demand for a charge in price OP makes TDb part of the demand curve DDb less elastic.
Increase in price: If an oligopolists increase the price above the prevailing price that is OP, he would lose his customers. The buyer would purchase from other oligopolist as the rival firm would not increase the price due to the fear of losing the customers and consequent decline in sales. The decline on sales of the firm which increases its price depends on the type of product and availability of product in the market. A substantial decrease in demand for an increase in price above OP makes the DT part of the demand curve less elastic. Now we have the demand curve DDb which can be divided into two parts DT and TDb.
The upper part that is DT is more elastic and the lower part is less elastic. The difference in elasticity’s gives a kink or bends for the demand curve at point . Rigid Price : Price charged by oligopolists is expected to cover full cost and also to bring excess profit if possible. The price thus charges remains the same without further changes. A change may come with the collective decision. The fear of losing market when price is increased not gaining much when price is reduced makes the oligopolist firm to stick to the price which they initially charge, hence the price become rigid or sticky.
The demand curve at the point of price has a kink, hence the demand curve is called kinky or kinked demand curve. The degree or extent of kink depends on the change in elasticity’s on the two segments of the demand curves. OLIGOPOLY AND NON-PRICE COMPETITION It is viewed with far more equanimity than price cutting and is frequently quite unrestrained. The basic reason is that retaliation is much more difficult against advertising, personal selling or product improvements, etc. than against price-cutting.
Patent and know how barriers, long and usually secretive gestation period, and delay in imitation are other important factors, Moreover, the sales effects of a particular promotional strategy are far less clear than the effects of price cutting. The various forms of non-price competition can be stronger and more durable products, product research and development, better quality packing and appearance, easier credit terms, home delivery, after sales service, longer period of guarantee, promotional effectiveness, dealer loyalty, etc.
A company’s use of non-price competitive strategy would vary according to the nature of the firm’s product of machine tools would not compete in the same manner as a producer of perfumes. Again, non-price competition takes the form of changing models in the motor-car industry and heavy advertisement in the soap and detergents industry. Due to liberalization of licensing, non price competition is getting more and more popular in India. Several TV manufactures are offering hire purchase/installment facilities. Many companies are discovering the virtue of after sales service. Non price competition may have some benefits to the producer in as much as higher sales induced by non price competition may lead to lower unit costs and production. But there is always a risk that changes in product designs may not be acceptable to consumers. However, from the viewpoint of consumers, non price competition is boon as they may get better quality goods and services. PRICE LEADERSHIP Price leadership is said to exist when firms fix their prices in a manner dependent upon the price charged by one of the firms in the industry.
The firm which takes the initiative in announcing its price changes is called the price leader. All the other firms in the industry which either match the leader’s price or some variation thereof are termed as price followers. Price Leadership arises due to following circumstances: 1. Lower Costs & Enough Financial Resources: One of the firms has a clear advantage in cost or productive capacity & enough financial reserves to stand the losses of a price war without being seriously crippled. 2.
Substantial Share of the Market: Often, although not necessarily, the largest firm becomes the leader because it is presumed to have the greatest stake in the welfare of the industry, greater power to enforce follower ship & the best informed about the industry demand and supply conditions& as such best equipped to determine price policy of the entire industry. 3. A Reputation for Sound Pricing Decisions based on Better Information & more Experienced Judgment than What the Other Firms Have:
In fact, price leadership frequently arises as a natural growth within an industry due to the successful profit history, sound management & long experience of the price leader in the marketing matters. The remaining firms accept the leader because of his ability to coordinate the industry’s growth with that of its members. 4. Initiative: Often the company which first develops a product or area retains the price leadership whether or not it retains the largest market. 5. Aggressive Pricing: Often a company may garb leadership through lower prices& thereby snatch large & profitable markets from conservative rivals.
TELECOM INDUSTRIES The cellular phone industry is one of India’s rapidly growing industries. Since the industry came into being in the mid 1990s, its average per annum growth rate has been a phenomenal 85 percent. By the end of 2002, the Indian cellular phone industry had over 10 million subscribers. The industry has undergone a number of changes over the years. The National Telecom Policy 1999 was an important landmark in the development of the cellular telecom industry in India; the tariff rationalization and policy regulation introduced in the Policy helped the industry grow at the pace it did.
The years 2001 and 2002 saw an increase in level of competition in the industry with more operators being given licenses, and fixed line providers also entering the mobile market. Central government raising the FDI limit in the Indian telecom sector from 49% to 74% increased foreign investments and global telecom big wigs are due shortly. Telecom Regulatory Authority of India (TRAI) has estimated that the country will need about 350,000 telecom towers by 2010, as against 125,000 in 2007. Growth in the telecom sector can be achieved through focusing on semi urban and rural areas.
It is expected that market size of the Indian telecom sector will be around US$40–US$45 billion by 2010, with 500 m subscribers and 20 m broadband subscribers. India added 8. 17 million telecom subscribers in December 2007, taking its total telecom subscriber base to 272. 88 million at the end of December, according to data released on Tuesday by telecom regulator TRAI. The overall teledensity stood at 23. 89% at the end of December 2007, against 23. 21% in November. The country had seen addition of 8. 2-million subscribers in November and total subscribers stood at 264. 77 million at the end of the month.
The wireless segment saw an addition of 8. 17 million subscribers in the month of December, against 8. 32 million in November. The total wireless subscriber base, including GSM, CDMA & WLL (fixed), stood at 233. 63 million at the end of December 2007. The wire line segment saw a fall in total number of subscribers. The subscriber base declined to 39. 25 million in December 2007, against 39. 31 million subscribers in November 2007. Total broadband subscriber base crossed 3 million to touch 3. 13 million by the end of December 2007, against 2. 87 million by the end of November.
Among wireless operators, Bharti Airtel added 2. 2 million subscribers in December, taking its total base to 55. 16 million. Vodafone Essar added 1. 3 million subscribers and its subscriber base totaled 39. 86-million at December-end. Idea Cellular, with a total subscriber base of 21. 05- million at December-end, added 0. 83-million subscribers in the month. Reliance’s total wireless subscribers, including WLL (F), stood at 40. 96-million after adding 1. 57 million subscribers during the month. Among wire line operators, state-run Telco BSNL saw its subscriber base decline by 0. 4- million in December to 31. 7 million. MTNL, too, saw its wire line base dip by about 0. 02 million to 3. 59-million. Bharti Airtel added 0. 04 million subscribers in December to take its total wireline subscriber base to 2. 17-million. MARKET STRUCTURE OF AIRTEL Airtel telecommunications faces an oligopolistic competition due to presence of a small number of competitors namely vodafone, spice telecom, idea etc. Because there are few players in the market, each oligopolist is aware of the actions of the other. The decisions of one firm influence, and are influenced by, the decision of other firms.
As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. Using this measure, an oligopoly is defined as a market in which the four-firm concentration ratio is above 40%. Here in the Indian mobile industry, a four-firm concentration ratio of over 70% exists. So, airtel is definitely a part of the oligopolist market structure. There exists a triopoly between Airtel, Vodafone and Idea and the competition is intense. The basic duopoly exists between Vodafone and airtel.
Yet, no winners survive in an oligopoly. The features are: * High rates of customer attrition * Heavy rates by TRAI * Homogeneity in products * Airtel is market leader and possesses attractive plans * Almost simultaneous drops in prices * Freebees are used as a market tool * Value added services are used to differentiate the products Airtel treads upon the following survival strategies :- 1) It focuses on corporate customers and is less resistant to price changes. 2) Informal agreements are made with rivals not to cut prices below a particular point. 3) It strives to build brand loyalty. 4) It provides more value added services.
Collusion There is a body working for the rights of the cellular providers, The Cellular Operators Association of India (COAI) which was constituted in 1995 as a registered, non-profit, non-governmental society dedicated to the advancement of communication. COAI’s main objectives are to protect the common & collective interests of its members. Price Leader There is a cut throat competition in the Indian Cellular market and there is no scope of having a single Price Leader in the market, as all of them compete for the prices and the customer base. But, airtel still manages to hold the maximun market share. Abnormal Profits
There is no evidence of abnormal profits in the Indian Cellular Market, as these providers are not competing among themselves for the higher market share and the profits. The Indian cellular market is also regulated by the Telecom Regulatory authority of India (TRAI). So there is very less chance for the competitors to gain abnormal profits. Barriers to Entry Termination Fees: If someone owns an interconnected cellular network, the incremental marginal costs will be directly proportional to the amount of traffic leaving the network and he will gain addition revenue for every inbound call from another network completed on the network.
These fees are normally set by the regulator and are an incredibly important barrier to entry. Churn: The next most important factor especially in a saturated market is the rate of churn, obviously the lower the rate the longer it is going to take a new entrant to get to equilibrium and therefore the higher the initial operating losses and funding requirements Customer Acquisition Costs: The new entrant needs not only the capital to acquire spectrum, build-out the network and finance start-up losses, but it needs enough money to acquire enough customers to get to equilibrium.
The higher the Customer Acquisition Costs the higher the barriers to entry. Investor Patience: Especially for a quoted company, the most difficult barrier to entry to overcome is investor patience. If anything goes wrong and payback takes longer than expected they could end up with a semi-crippled subsidiary without the investment required to get to “optimal” market share. Interdependence
Although there is a cut throat competition in the Cellular market, there are a fixed number of firms in the cellular market, so the cellular providers are likely to recognize their interdependence. The homogeneity and the similarity of costs make them interdependent. From these discussions, we can conclude that the mobile service provider-AIRTEL in India closely resembles an oligopoly. —————————————————————————————————-

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